High NPL levels have been a severe problem in both Central and particularly Southeast Europe since the global financial crisis, weakening banks’ capital strength and hindering them from extending new credits. Ratios have now been falling for three years, though NPLs are still between 10-20% in six of the 17 countries in the two regions.

The EU report assesses the progress of member states in decreasing the level of NPLs. Within the EU, it is improving constantly and declined by 1pp to 4.6% in the second quarter of 2017 – the lowest level since the end of 2014.

“This reduction was mainly the result of one‐off events that impacted all bank‐size classes, in particular smaller banks,” the report noted.

In Central and Eastern Europe, Bulgaria remained the country with the highest level of NPLs, ranking fifth among the countries in the European Union after Greece, Cyprus, Portugal and Italy. The European Commission has criticised Bulgaria several times for the high share of NPLs, forcing the local banks to take urgent steps to clear the bad loans from their portfolios.

The level of NPLs in Bulgaria stood at 12.1% as of end-June 2017 – although marking a progress from a year earlier, when it stood at 14%. The share of NPLs in the loans to private sector decreased to 19.2% from 22.4%.

In Croatia, the share of NPLs slightly increased to 11.7% as of end-June 2017 versus 11.6% a year earlier, according to the report. The share of NPLs of all private-sector loans fell to 16.5% from 16.9%. The report recommended that Croatia should improve the quality and efficiency of the justice system, in particular by reducing the length of civil and commercial cases, which should help the country to further reduce the share of NPLs.

In Romania, the share fell to 8.5% from 11.3% and the share of NPLs of all loans to private sector went down to 11% from 15.3%. Romanian banks have been active in selling off bundles of bad loans in recent years.

Slovenia posted one of the fastest declines of NPLs (down to 11.4% from 16.3%). Private sector NPLs also declined from 21.2% in June 2016 to 14.7% in June 2017.

“Most of the recent reduction is due to restructuring efforts, repayments, write-offs, debt forgiveness and sale of NPLs to third party (private) institutions, the stock of NPLs of households remains very low, at 4.4% as of June 2017,” the report noted.

The bad loans ratio in Slovenia has been declining since 2013, when the country nearly avoided an international bailout because its banks were overburdened by NPLs. At end-2016 the share was 8.5%, and it had fallen further to 6.7% in November 2017 according to the new harmonised definition of the European Banking Authority (EBA), the Slovenian central bank Banka Slovenije announced on January 17.

Earlier in January, European Commission Vice President Valdis Dombrovskis said that Slovenia is among the best EU members in terms of the proportionate reduction of the share of non-performing loans as well as that its banks had enough reserves to cover potential future losses.

The Baltic states were among those with lowest level of NPLs. In Estonia, the ratio stood at 2% compared to 2.1% in Q2 2016. The share of NPLs among all loans to the private sector was also low at 2.5% compared to 2.7% a year earlier.

In Lithuania, the share of NPLs was 3.7%, down from 5%. The level of bad loans decreased in private sector to 4.9% from 6.5%. Latvia had the highest share of NPLs among the Baltic states – 5.9%. This was also the only country in this region that posted an annual growth of NPLs (from 5.5% in Q2 2016) as the level of bad loans in private sector increased to 9.3% from 8.9%.

The Czech Republic marked significant progress as its NPLs fell to 2.9% from 4.6% with bad loans in private sector declining to 5.3% from 6.7%. Slovakia performed even better with bad loans being just 4.1% (down from 5.1% in Q2 2016). Private sector NPLs also declined y/y to 4.7% from 5.7%. The report noted that the country has to improve the effectiveness of its justice system, including a reduction in the length of civil and commercial cases.

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